Theory vs. Practice: Confessions of a Microfinance Heretic

“Journalism,” George Orwell is supposed to have said, “is printing what someone else does not want printed: everything else is public relations.”

I don’t know if Hugh Sinclair realizes this, but despite lacking any formal journalism training, he has indeed committed an act of journalism in his recently published book, “Confessions of a Microfinance Heretic: How Microlending Lost Its Way and Betrayed the Poor.”

The book’s title is indicative of what’s inside and Mr. Sinclair does a nice job backing up his claims with well researched and annotated sources where the source is not his own decade of experience in the field. Among the basic findings:

Microborrowers at some of the industry’s poster child institutions pay interest rates considered usurious, extortionate and predatory in any other context, but somehow the microfinance canon has convinced a critical mass of people that this is the road to solving poverty;

Due diligence by American and European microfinance investment funds into microfinance lenders is all too often a joke, and not a very funny one;

In certain cases, financiers, some of whom represent the largest banks in the world, are aware of what are arguably unsustainable and unethical practices at microfinance institutions but turn a blind eye to them in the pursuit of greater yield.

And much, much more. Here’s a short list of what else this book is: jarring, jaw-dropping, infuriating, inflammatory, and yes, heretical. At the same time: enlightening, engaging, inspiring, illuminating.

And now here’s an even shorter list of what this book is not: bullshit.
It’s never fair to extrapolate one quote or passage as being representative of a book as important as this one, but since I happened to have my laptop open as I was finishing it, I couldn’t help pulling a couple quotes. Here’s one regarding the proposition that credit may be a “human right”:

But what did Muhammad Yunus actually say about this human right? “[Credit is] also a human right, so that people can create their self-employment with that money. If they can create income for themselves, they can take care of right to food, right to shelter much more easily than government can ever do it.” If, as some have speculated, 90 percent of microfinance is directed to consumption, or loans cost 144 percent, how does this create employment or income? This is the difference between the theory and the practice of microfinance.

And here’s another a few pages later:

…the debate is not whether microfinance works, but how the inherent conflicts of interest can be managed.

I would actually consider Chapter 13 alone to be a mission statement for the entire industry.

What else is in this book…obviously a lot of uncomfortable truths, but I think the most appropriate way to continue discussing them here would be to break it down by audience types.

To the uninitiated but curious:
Microfinance is not all bad. And Mr. Sinclair makes a significant effort to show real examples of how it can work and an action plan of what is needed to improve it. To the extent his overall stance comes off as more negative than positive, bear in mind his challenge is the same challenge facing journalists attempting to be balanced about something whose reality is undeniably lopsided by any clear-headed estimation. But this shouldn’t be a reason to opt out before even trying. These challenges have a lot at stake and a lot of deceptive interests guiding them. Microfinance needs all the honest people it can find.

To the disillusioned:
Nobody said the solution to poverty would be easy. And if anything, Mr. Sinclair has over the course of the past decade made a commendable try at it, this book being merely the most recent. As Mr. Sinclair also demonstrates, basic due diligence really is not difficult. In a nutshell: be careful whom you trust. And if you walk away for good, I wouldn’t blame you.

To the persistent believers:
See my comments to follow regarding ideology.

And to the deceivers:

Kiva gets a roasting.

Grameen Foundation USA doesn’t look particularly good.

Deutsche Bank is definitely not innocent but far from the worst offender.

The SMART Campaign is actually misnamed—CRAFTY would be more appropriate.

The Calvert Foundation exhibits fair evidence that fancy pedigrees don’t translate into solutions that help more than hinder the world’s social problems.

Triple Jump is staffed and run by criminals. There’s really no other word for it.

And the #1 cheerleader, Muhammad Yunus, in Mr. Sinclair’s words, is the shepherd who lost control of his flock. In my words, Yunus comes off as well-intentioned but disturbingly naïve, and his Nobel Peace Prize only raises more cause for suspicion.

(Note to deceivers not on this list: beware, your time will come)

And now for the disclosure of interests and relationships and motives and all that other conspiratorial stuff anxious supporters are no doubt questioning at this point:

Let me begin by saying that prior to reading Confessions of a Microfinance Heretic, I was always of the school that let’s say is more pro-Compartamos than anti-Compartamos. That doesn’t mean I ever believed charging anyone 144 percent interest rates was a reasonable thing to do under any circumstances; simply that if the microfinance world must be divided into only two camps, the approach Yunus outwardly preached of eschewing profit entirely and/or the Kiva approach of offering investors zero percent yield while declining to divulge interest rates charged to end-borrowers always struck me as absolutely unsustainable, not to mention incredibly naïve. Like it or not, there has to be a profit motive for any of this to work.

I still mostly hold to this view. But what Mr. Sinclair has done is articulated a middle ground in a far more readable way than anyone else I know of to date.

The second “disclosure” is that since I launched this blog, I’ve received periodic emails from readers asking something to the effect of, “what’s your ideology?” The short answer is that to the extent that I have any ideology, my ideology is anti-bullshit. This sort of attitude has led me to take sides with all manner of people, some of whom I don’t see eye to eye with on a range of other issues. But it almost always means taking fire from ideologues who would rather put everything into a box than take a few extra minutes to get it right.

No reasonable person clings to some viewpoint rendered impractical in the face of new evidence to the contrary.

Furthermore, I’ve noticed a growing practice in public discourse generally, but particularly in the microfinance space, that really drives me up the wall, and that is discrediting the speaker as a way of changing the conversation from being about facts to being about whose mouth is speaking those facts. To quote another wise political operator now departed, the late New York Senator Daniel Patrick Moynihan famously told one of his colleagues, “You are entitled to your own opinions, but not your own facts.”

And it is with this idea that I highly recommend Confessions of a Microfinance Heretic. But given the persistence of messenger-shooting by parties lacking any other recourse, I would be remiss in not making this equally as much an author review as a book review. So at this point I should probably briefly describe my dealings with the author.

Mr. Sinclair and I first met five years ago at a microfinance conference in El Salvador—specifically, the Inter-American Development Bank’s annual FOMIN circus, for those of you in that loop. At that point, I was spending a lot of time at conferences and public events on behalf of my company whose mission concerned the foreign exchange markets of developing countries, and by “developing” I mean that Mexico was too liquid for us and Brazil kind of was too (basically any country with a 30-year yield curve, even if untradable, was in practice already too liquid for our products).

There was and still is no one event that suitably addresses all the overlapping universes my partners and I wanted to engage, so practically speaking this meant attending a range of events catering to everyone from microfinance to hedge funds to think tanks to multilateral institutions. In short, our audience was the spectrum of folks that might fall into one of the three categories on this blog’s “About Diverging Markets” page.

At some point I began to notice certain fixed dynamics driving these events. One was that anyone truly plugged in to the event’s theme is highly unlikely to learn anything new from speeches or panel discussions. This leaves networking as the main source for whatever else can be gleaned from these things. Some people come with private meetings already scheduled; I was rarely one of these as my role was more reconnaissance-oriented, which meant I was usually floating through the melee and seeing who turned up. And generally speaking, the proportion of “useful” people one meets really doesn’t change regardless of the conference’s theme, entrance fee, location or any other variable.

The number of people one meets who are directly and immediately relevant can be counted on one hand. An equally small handful of people I met were plugged into something very different than I was but always had interesting lay-of-the-land knowledge to share. And then the vast majority of people are linearly and singularly focused, and anyone who doesn’t fall within the target scope of what those people are there for may as well not exist.

Finally, there’s always one guy, and it usually is a guy, who’s kind of skating along the edge and could take it all as easily as he could leave it. He knows his stuff, and he knows it better than 99 percent of the rest of the people there, something like the slacker-prodigy you knew back in school who always seemed to achieve the highest marks without ever giving the impression of doing any work. And if we absolutely must talk business, then that guy will talk business. But the biggest obstacle to talking business is the immeasurable task of blocking out the surrounding noise masquerading as business that is in reality hogwash.

And that was my first impression of Hugh Sinclair, drawn to each other initially by an appreciation for the straight dope and a good cigar. While I can’t stand on decades of experience in many things to claim expertise, I think I’ve done enough schmoozing in my 38 years to consider myself rather adept at casing people out by now. I’ve never done any business with Mr. Sinclair, but at this point I’ve met him enough times to feel quite confident casting my lot with him.

Oh and by the way—he has more field experience in microfinance than anyone else I know.

Further reading:

Book homepage, which includes other reviews, endorsements and purchase details is here.

I am from INDIA, and I worked in a still more disguised form of Mircofinance…… SHG Federations. The difference between MFI and these SHG federations is MFI lends directly to the clients, while SHG federations ( mostly registered under Indian Trust Act/ Society’s act) links bank loans directly to SHGs, thus playing a intermediary role. SHG Federations are even more safe in that.. they do not have any repayment liability at all and the responsibility falls only on SHGs. But however these, federations promoted from behind by some prominent NGOs, gain income through service charges. Here again the concept it good. But there is drifting of focus and all problems that Sinclair focus, can be found also in these institutions, except that interest rates are comparability lesser . I too struggled to reform it, in just one single federation but my voice got suppressed. Banks which lend to women SHG members and the SHG members, both are the losers and the federations play a safe card. Yet mismanagement and interference of government and politics has killed the soul of SHG Federation. To put it simply, Microfinance has nothing to do with poverty reduction. It just another way of lending and exploitation of the community. I agree 100 % with the views of HUGH SINCLAIR. Hat off to him for writing such a book.